Inside Asian Gaming

INSIDE ASIAN GAMING | October 2009 4 Editorial Publisher Kareem Jalal Director João Costeira Varela Editor Michael Grimes Operations Manager José Abecasis Contributors Desmond Lam, Steve Karoul I. Nelson Rose, Richard Marcus Shenée Tuck, James J. Hodl Andrew MacDonald William R. Eadington Graphic Designer Brenda Chao Photography Ike Inside Asian Gaming is published by Must Read Publications Ltd Suite 1907, AIA Tower, 215A-301 Av. Comercial de Macau - Macau Tel: (853) 6646 0795 For subscription enquiries, please email subs@asgam.com For advertising enquiries, please email ads@asgam.com or call: (853) 6646 0795 www.asgam.com Printed by Unique Network Printing Factory Ltd. Tel: (853) 2828 2832 Fax: (853) 2828 2830 E-mail: unique@macau.ctm.net Michael Grimes We crave your feedback. Please email your comments tomichael@asgam.com Balancing Act Gaming equities shouldn’t get too far ahead of underlying markets A number of economists are increasingly emphasising the role that human psychology has in making and shaping financial markets. By this reckoning, downturns are inevitable. Overconfidence in a rising market leads to asset bubbles, which leads to sharp price corrections, which leads to downturns or actual recessions and so on. While this may seem a rather gloomy assessment of the human condition as it applies to economics, it does appear to miss out an important cultural factor. Collective human knowledge gives people the opportunity to learn from others’ past mistakes. Last autumn’s credit crisis and the accompanying asset price collapse have been compared to the Wall Street Crash of 1929. But the worst excesses of that 80-year old disaster were avoided precisely because enough of the people that matter in economic decision making had read up on it and were determined to avoid the same mistakes. The received wisdom today is that the key error in the 1930s was the attempt by the free market economies to allow the system to rebalance itself without the aid of timely and effective government financial stimulus. If we apply the cyclical boom-bust dynamic to the Asian gaming industry and its financing and operational management, we might reasonably ask: ‘Have lessons been learned post 2008 credit-crunch?’The answer is probably: ‘Yes and no’. ‘Yes’in the sense that with a squeeze on credit (in both the project capital markets and the VIP player markets in the case of Macau) and a rise in the price of what little cash is available for loans, casino operators are looking a lot more closely at the cost of new infrastructure investments and the potential yield on invested capital. Probably ‘no’ in the sense that if Wynn’s Hong Kong initial public offering share price is anything to go by, it appears equity is being priced extremely aggressively in a still uncertain market. A former head of the US Federal Reserve once observed that it’s the job of central bankers to take away the punch bowl just as the party gets going. In China, where equity markets—because of the large number of retail investors—often resemble casinos rather than rational trading environments, there is as much if not more need than in the West for government to limit partygoers’ access to the punch bowl. The fact that most of the initial frenetic demand for Wynn’s local IPO was from institutions rather than retail investors may give some reassurance to government and to the markets. But if the re-establishment of an orderly and liquid credit market continues to lag well behind stock market growth, then equity may be not only the cheapest but also the only realistic way of raising capital. The danger is this will over-inflate prices in that particular asset class to the long-term detriment of investors. Ask executives at Permira—the Europe-based private equity fund that bought a 20% stake in Galaxy Entertainment Group in the autumn of 2007—how that feels. Or ask James Packer, co-chairman of Melco Crown Entertainment, about the Las Vegas casino investments made on behalf of Crown Ltd that were later written down to the tune of US$290 million. And let’s not forget, of course, the most celebrated example in the global gaming market—the fall in Las Vegas Sands Corp’s stock price that followed the global credit crisis in September 2008. At its worst, the company’s stock fell 98% from historic peak to historic trough. For those investors with sufficient underlying liquidity who wish either to flip a stock or to go long, the 2008 collapse in asset prices was a pricing opportunity, not a curse. The fact remains, however, that if the casino equity market gets significantly out of balance with the underlying regional economy and its supporting credit markets, it is unlikely to end entirely happily for shareholders.